Investors are confronted with difficult decisions and adverse circumstances as a matter of course. But in the current environment, Asia-Pacific institutional investors seem deserving of particular sympathy.
Like their peers elsewhere, they are struggling to balance long-term liabilities with the need to secure yield in a world where it is increasingly scarce, which almost inevitably opens the door to greater volatility and risks. And as elsewhere, the rising tide of local and global regulation, coupled with the increasing prevalence of sustainability mandates and environmental, social and governance (ESG) targets, is piling complexity onto this process.
But Asian institutional investors are also contending with unique challenges. Their home region is the world’s fastest-growing, presenting no shortage of opportunities but also no shortage of risks that could cloud a long-term investment approach—from China’s growing debt burden to competing territorial claims in the South China Sea and an increasingly bellicose North Korea.
Many of the region’s largest economies, including China, South Korea and Japan, are aging rapidly, threatening the future viability of pension systems and putting additional pressure on pension funds and insurers to boost returns. Climate change is also forecast to hit Asia particularly hard, with the Asian Development Bank recently warning of potentially severe impacts on economies, infrastructure and agriculture.
All this leaves Asia’s institutional investors with the unenviable task of reconciling competing and sometimes contradictory objectives, simultaneously factoring in current trends and long-term possibilities, all while being subject to the scrutiny of regulators, stakeholders and, in many cases, the general public. How Asian investors approach this delicate juggling act, and how it is shaping their future strategies, is the subject of this paper.
A new study from the Economist Intelligence Unit and sponsored by Franklin Templeton Investments finds that many institutional investors are reacting to current market conditions with large shifts in their short-term investment strategies. In Asia-Pacific, 52% of investors say they are increasing their portfolio turnover to find yield, despite the increased risk that such action entails. Meanwhile, 45% have reallocated asset classes due to regulations, and four in 10 are shortening holding periods.
These trends show little sign of reversing in the near future, as Asia-Pacific investors remain focused on market volatility as the number one barrier to lengthening their investment horizon.
However, Asia-Pacific’s institutional investors’ increased willingness to hunt for short-term returns seemingly contradicts their approach towards their return targets. Only 27% say immediate pressures have prompted them to adopt a short- term approach to setting return targets, while 39% say these pressures have actually made them more focused on long-term objectives. Many of the respondents are insurance companies and pension funds; investors with lengthening liabilities that highlight the difficulty of achieving future targets.
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All investments involve risks, including possible loss of principal. Source: Survey of 200 institutional investors in APAC conducted by The Economist Intelligence Unit (EIU) in June-July 2017. The EIU had final editorial control of the survey, and, for avoidance of doubt, was not obliged to comply with any input from Franklin Templeton Investments, which sponsored the survey.